Visit vanguard.com or contact your broker to obtain a Vanguard ETF or fund prospectus which contains investment objectives, risks, charges, expenses, and other information; read and consider carefully before investing.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in Creation Unit aggregations. Instead, investors must buy or sell Vanguard ETF Shares in the secondary market with the assistance of a stockbroker. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

Investments in bond funds are subject to interest rate, credit, and inflation risk.

Diversification does not ensure a profit or protect against a loss in a declining market.

Stocks of companies in emerging markets are generally more risky than stocks of companies in developed countries.

An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund.

All investing is subject to risk, including possible loss of principal.

While listening to groups of investors recently as part of some research, we learned something that was, to us, a bit disappointing.

And thereby hangs a tale.

One thing the research confirmed is that even a good number of Vanguard clients don’t know the single most important thing to know about Vanguard.

And that’s this: Unlike all other mutual fund companies, Vanguard is client-owned. The clients who put their dollars in our mutual funds are the owners of those funds. And those funds, in turn, own Vanguard. The bottom line: Vanguard does not make a profit from operating our mutual funds.

OK, so it’s not surprising that investors with busy lives to lead don’t know about Vanguard’s corporate structure. What is a bit surprising is that, even when investors patiently listen to and understand the explanation, they tend not to believe it.

“Somebody at Vanguard has to be taking the profits out of the operation,” was the skeptical view.

I suppose folks have plenty of reasons to be skeptical about financial companies. But we really are client-owned.

No one, other than the funds and their shareholders, owns a piece of Vanguard. Nobody. Our CEO, Bill McNabb, and even our founder, Jack Bogle, are client-owners in exactly the way you are. We really are the only mutual mutual fund company.

So, why is this client-owned stuff so important? It’s important because that structure dictates everything else about Vanguard.

Because the clients, through the various mutual funds, own the enterprise, Vanguard operates at cost. Each fund pays a portion of Vanguard’s expenses—for salaries, facilities, computers, operating capital, etc. But the fund expenses don’t go to provide profits to an owner of Vanguard, because the funds are the owners. The funds and their shareholders keep the money that would go to profits at a typical mutual fund sponsor.

Thus client ownership leads to operating at cost, which leads to lower expense ratios for the funds. And lower expenses are important, because low costs keep more of your money working for you.

Even our investment philosophy flows from being client-owned. We advocate basic—even boring—investment principles like being diversified and balanced and taking a long-term perspective because we’ve found those elements tend to work.

It’s harder for investors with unbalanced portfolios to stick with a long-term investment program. An unbalanced portfolio—all stocks or all bonds or all cash—will perform well in certain conditions, then poorly in others.

If you’re working for your client-owners, you have no incentive to tempt them with investment concepts that may have sizzle but little substance. You have no reason to tout the returns of your hottest-performing funds, which sooner or later will cool off. You have every incentive to put the client-owner’s interests first, because there is no conflict with the interest of the investor who, through his or her fund shares, owns the mutual fund’s management company.

Once you understand the links—from client ownership to at-cost operations to low costs to an enduring investment philosophy—we hope it all makes sense. Even for the skeptics.

Notes:

• All investments are subject to risk. Investments in bonds and bond funds are subject to interest rate, credit, and inflation risk. Diversification does not ensure a profit or protect against a loss in a declining market.

• Vanguard provides services to the Vanguard funds at cost. More information about Vanguard funds, including at-cost services, is available in each fund’s prospectus.

Like this:

Craig Stock

Craig Stock heads Vanguard's Corporate Marketing and Communications department, responsible for delivering investor information and education in Vanguard’s "plain talk" style.
Before joining Vanguard in 1995, Craig spent two decades in journalism. At The Philadelphia Inquirer, he reported on business and the economy, served as a business editor, and wrote a column on personal finance.
Craig holds a B.S. from the University of Kansas, and was a Sloan Fellow in Economics Journalism at Princeton University's Woodrow Wilson School. He’s also the author of Investing During Retirement, published in 1997.

Anonymous | March 29, 2011 11:36 pm

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At Vanguard, we’ve always believed in candid, direct communication with investors. In fact, it’s one of our core principles. In 2009, we created the Vanguard Blog so that we could talk about what’s happening in our industry and in the economy—and hear what’s on the minds of investors like you. More

Connect with Vanguard®

Visit vanguard.com or contact your broker to obtain a Vanguard ETF or fund prospectus which contains investment objectives, risks, charges, expenses, and other information; read and consider carefully before investing.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in Creation Unit aggregations. Instead, investors must buy or sell Vanguard ETF Shares in the secondary market with the assistance of a stockbroker. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

Investments in bond funds are subject to interest rate, credit, and inflation risk.

Diversification does not ensure a profit or protect against a loss in a declining market.

Stocks of companies in emerging markets are generally more risky than stocks of companies in developed countries.

An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund.

All investing is subject to risk, including possible loss of principal.